PHILRECA v DILG

Facts:

- On May 23, 2003, a class suit was filed by petitioners , electric cooperatives of Agusan del
Norte (ANECO), Iloilo 1 (ILECO 1) and Isabela 1 (ISELCO 1) in their own behalf and in behalf
of other electric cooperatives organized and existing under PD 269, as amended which are
members of petitioner Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA)
and registered with the National Electrification Administration (NEA).

- Under P.D. No. 269, as amended, or the National Electrification Administration Decree, it is
the declared policy of the State to provide "the total electrification of the Philippines on an area
coverage basis” and to assist electric cooperatives in providing electric service by giving them
support and assistance

- Under Sec. 39 of PD 269 electric cooperatives shall be exempt from the payment of all
national government, local government, and municipal taxes and fees and any charges, or
costs involved in any court or administrative proceedings in which it may be party.

- From 1971 to 1978, in order to finance the electrification projects envisioned by PD 269, as
amended, the Philippine Government, acting through the National Economic Council (now
National Economic Development Authority) and the NEA, entered into six loan agreements with
the government of the United States of America, through the United States Agency for
International Development (USAID) with electric cooperatives including petitioners as
beneficiaries.

- The loan agreements contain similarly worded provisions on the tax application of the loan
and any property or commodity acquired through the proceeds of the loan.

- Petitioners allege that with the passage of the Local Government Code their tax exemptions
have been validly withdrawn. Particularly, petitioners assail the validity of Sec. 193 and 234 of
the said code.

Sec. 193 provides for the withdrawal of tax exemption privileges granted to all persons,
whether natural or juridical, except cooperatives duly registered under RA 6938, while

Sec. 234 exempts the same cooperatives from payment of real property tax.

- Petitioners claim that such provisions are unconstitutional because they impair the obligation
of contracts between the Philippine Government and the United States Government

Issue:

Is there an impairment of the obligations of contract under the loan entered into between
the Philippine and the US Governments?
Held: NO

1. It is ingrained in jurisprudence that the constitutional prohibition on the impairment of

the obligations of contracts does not prohibit every change in existing laws.

2. To fall within the prohibition, the change must not only impair the obligation of the
existing contract, but the impairment must be substantial.

3. What constitutes substantial impairment according to this Court in the case of

Clemons v. Nolting is:

A law which changes the terms of a legal contract between parties, either in:
- the time or mode of performance,
- or imposes new conditions,
- or dispenses with those expressed,
- or authorizes for its satisfaction something different from that provided in its terms,

is law which impairs the obligation of a contract and is therefore null and void.

4. Moreover, to constitute impairment, the law must affect a change in the rights of the
parties with reference to each other and not with respect to non-parties.

5. In this case, the quoted provision under the loan agreement does not purport to
grant any tax exemption in favor of any party to the contract, including the
beneficiaries thereof.

6. The provisions simply shift the tax burden, if any, on the transactions under the loan
agreements to the borrower and/or beneficiary of the loan.

7. Thus, they do not impair the obligation of the borrower, the lender or the
beneficiary under the loan agreements as, in fact, no tax exemption is granted therein.